Saturday, December 19, 2009

The Missing Puzzle-Piece

So I read this Animal Spirits post on John Williams' prediction of hyperinflation, and it got me thinking: We don't have an anti-inflation policy anymore.

Yeah, we have the Fed. But the Fed's policy these days seems to be to avoid deflation. That's pro-inflation policy.

What else have we got? Nothing. We've got fiscal policy, which is always stimulative because the budget is never in balance. And we've got the tax code, which is always pro-growth or pro-spending (or pro-investment; but investment is spending), and therefore pro-inflation. And we've got the Fed, trying to keep prices from dropping.

No anti-inflation policy.

We need an anti-inflation policy and we have too much debt. Hmm... Too bad there's not some way to kill two birds with one stone here. And you know, there is a way.

To fight inflation we need to take money out of the spending stream. Hmm... We need to get people to spend a little less...

Now that's odd. These days people are spending less. That's what "recession" means: to go backwards.

And people are trying to reduce debt. That's where the money's going. That's why it isn't pushing up prices. That's why the Fed these days is trying to keep prices from dropping...

So people are spending less and trying to reduce debt. Now, that's an anti-inflation policy. If we'd been doing it since the 1970s, we'd have a lot less debt today, and prices would be a lot lower. And we would have avoided this credit crisis and the threat of depression. We would have avoided that.

People want to spend less right now, and reduce their debt. So, maybe Congress should try to get on everybody's good side, and help us reduce our debt. Maybe Congress should set up tax incentives to accelerate the repayment of debt. Pay off a little extra debt, get a little break on your taxes. People would go for that, I think. Congress would do it, to get on our good side. And it would help the economy.


jbpeebles said...

Appreciate New Arthurian commentary on my blog post.

The problem is in the creation of debt. The more that is created, the less attractive it becomes.

We know from the now-famous Grignon video, "Money as Debt" that our dollars represent an IOU, which is the opposite of an asset--a promise to be paid. And in turn, what is the Fed's promise to pay based on? Surely not the Fed's own credit, as they are private bankers who can't cover all that which they're obligated. The credit is based, of course, on taxpayers' taxes, present and future, gathered through the IRS.

It's not a coincidence therefore, that the purchasing power of the money created since the Fed's invention in 1913 has lost over 96% of its value.

Carrying debt isn't a big deal at these interest rates but will be.

Under my post, Arthur comments about bubble reinflation, and I did find the idea that we must shrink in order to grow viable. But the economic cycle can hardly be expected to require such violent upheaval in order to grow again.

We have come to expect never-ending improvement in our quality of life--consumer borrowing has just delayed the reckoning when we must live within or means. The slowdown in spending is anti-inflationary but depressionary if too extreme. If consumers can't borrow, gov't spending must fill the gap in order ot keep growth up.

Marx would define capitalism as doomed to inevitable cycles of creation and destruction. the monetary system mimicks this dichotomy as giant sums of capital are churned, lost, shoveled about in the great derivates game.

--feel free to move this comment

The Arthurian said...

jbp: "The problem is in the creation of debt."

Aye, and the solution is in the reduction of debt.

We need to put as much "financial innovation" into finding ways to reduce debt, as we have in finding ways to create it.